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Divergence of Cash Flow and Voting Rights, Opacity, and Stock Price Crash Risk: International Evidence
Author(s) -
HONG HYUN A.,
KIM JEONGBON,
WELKER MICHAEL
Publication year - 2017
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.12185
Subject(s) - voting , cash flow , crash , panel data , outlier , business , stock (firearms) , econometrics , agency cost , financial economics , economics , monetary economics , actuarial science , finance , statistics , corporate governance , shareholder , geography , mathematics , archaeology , politics , political science , computer science , law , programming language
This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.